Interesting article on STOLI vs Life Settlements

I came across this article from Michael Kreiter of the Life Insurance Settlement Association on the clear distinction between a life settlement transaction vs. stranger owned life insurance (STOLI). There continues to be an ongoing "myth" in the life insurance industry that these transactions are the "same" and that perception could not be further from the truth. Those that support life settlement (and actively work in that market) have as much heartburn over STOLI as carriers do and do not want any part of those transactions-STOLI is bad for carriers, both the life and life settlement industries, and most importantly they are bad for the consumer.

     

Never hold discussions with the monkey when the organ grinder is in the room.

Sir Winston Churchill (1874 - 1965)

--Want to find STOLI? Ask the carriers!
The rhetoric, day in and day out, is always the same from insurance carriers…”all you have to do to find how much STOLI exists is ask the life settlement providers.” Time and time again, carriers and their trade organizations incessantly utter their bleat: STOLI/Life Settlements, STOLI/Life Settlements, STOLI/Life Settlements.

First and foremost, it is important to discern what IS – and IS NOT – STOLI before one can cast a stone. Stranger-originated life insurance is exactly what the term describes – life insurance originated by a stranger. These schemes are typically initiated by a third party looking to own and control a policy from its inception in violation of insurable interest laws.

Importantly, life insurance policies are not sold in a vacuum – there is a licensed insurance producer who has been appointed as an agent of the insurer. Carriers are responsible for performing underwriting and due diligence to seek out fraud and illegal activities in applications for new insurance.

A life settlement, on the other hand, is a lawful sale of a lawfully owned life insurance policy by a lawful owner. This transaction is highly regulated and transparent and, in all but a handful of states without settlement laws, is made to a licensed life settlement provider.

It would seem only natural when looking for STOLI to focus on circumstances surrounding the application and issuance of policies and NOT the sale of a lawfully owned policy. To find out how much STOLI exists, ask the insurers. Require them to report on how many policies they issued in violation of state anti-STOLI or insurable interest laws, or how often insurance companies issued policies where there was fraud or misrepresentations in the applications for the insurance.

Since STOLI involves the issuance of new policies in violation of state insurance laws, such an inquiry would also look at how many of the insurers’ appointed agents have been engaged in illegal activities and how many agents have been subject to termination, regulatory action or litigation for their involvement with STOLI.

And ask the insurers how many life settlement brokers and life settlement providers have been found by regulators or other law enforcement entities of illegally manufacturing policies. Of the more than 300 so-called lawsuits involving STOLI that the ACLI says are pending, how many are against life settlement companies? These are the questions that should be asked in an inquiry into STOLI.

Posted on August 29, 2012 by Michael Kreiter, Director of Legislative and Regulatory Affairs, LISA Written by: Michael Kreiter, Director of Legislative and Regulatory Affairs, LISA on August 29, 2012.